RATES ON THE RISE
WHAT INTEREST RATE HIKES MEAN FOR FARMERS.
The Federal Reserve hiked interest rates in September for the third time in 2018. That was the eighth rate increase since late 2015. Another raise is expected in December, along with three jumps in rates in 2019 and one jump in 2020. Here are eight points to keep in mind when you are thinking about how interest rates may affect your farm.
1 Rates are still historically low.
When the financial crisis hit in 2008, the Federal Reserve Open Market Committee, or the Fed, set the federal funds rate to 0% or .25% to influence economic activity and to bring the economy back. It kept it there until December of 2015. The recession was prolonged and the recovery slow. Since then, it has increased rates a few times by .25% each time. It calls that “tightening monetary policy.” That impacts the absolute shortest-term rate – the overnight rate.
The Fed took action in September to increase that overnight rate from 2% to 2.25%. That is historically still relatively low. As the economy heats up, with new tax laws and low unemployment, the Fed is increasing rates because it doesn’t want the economy to overheat and trigger inflation. This is being done in a measured pace, because if it goes too quickly, that will stifle the economy and the country could go back into recession again.
2 Long-term rates less affected.
Short-term type of loans such as revolving lines of credit and operating loans are going to be impacted more than long-term loans, say, for home mortgages. Farmers’ day-to-day operational funds, using an open line of credit, are more impacted than their longerterm borrowing. They’re seeing the biggest impact on open lines of credit and very short-term borrowing.
Expect Another rate hike this year.
The Fed has already increased rates three times this year and will likely increase it once more – in December. That would be a full percentage point in quarter increments for the year.
Current events impact the Fed’s decision.
Right now, the big story is trade policy between the U.S. and China. Markets react around the world. That impacts the Fed’s decision on whether it increases rates and how quickly.
There is no need to panic, but call your lender.
Farmers with long-term fixed mortgages are locked in, but customers on adjustable-rate loans getting ready to adjust can see a pretty significant increase.
It comes down to the terms of your loans. Make sure you understand your loan agreements. Talk to your lender this fall. If you were using short-term money that was very inexpensive two or three years ago, you may look at that differently as the short-term rates increase.
6 Don’t change plans overnight.
If your business plan calls for expansion, stick with it. Don’t make decisions based only on interest rates. Interest expense is only one of the costs to manage.
7 This is not your grandfather’s 1980s Farm Crisis.
In the 1980s, high inflation drove interest rates. That is not the case today. The longterm outlook for inflation today is about 2%, but you never know what the future will hold.
8 Watch the Fed.
It controls the overnight federal funds rate and it gives a lot of information on those longer-term views. That can really help you understand what the economy is doing and how it could affect agriculture. The two things the Fed focuses on are maximizing employment and keeping inflation around 2%. We are there with full employment and 2% inflation. The Fed is managing that short-term rate in order to keep those things in balance.